Highlights

• Largely status quo. We attended WCT’s 3QFY16 investor’s briefing, its first since the changes in its major shareholders earlier this month. Despite the emergence of property tycoon Tan Sri Desmond Lim (TS Lim) as WCT’s largest shareholder (20% stake), management guides that its operations will remain largely status quo. Some of the key changes include (i) replacement of 4 Board of Directors and (ii) TS Lim to take over from outgoing MD Mr Peter Tiang who will continue to serve as an advisor until June 2017. Mr Goh Chin Leong will continue to serve as WCT’s 2 nd man, while the heads of construction and property will also remain.

• Monetising via PREIT. Management is exploring the disposal of its malls to PREIT (BUY, TP: RM1.95), which is also owned by TS Lim (28%). The proposal is for an all cash deal (as opposed to units) which could see AEON BBT valued at RM500m and Paradigm Mall at RM700m which could take place as soon as 6 months’ time.

• Seeing red on cost overruns. On the 3QFY16 results which saw losses for the construction division (EBIT: -RM3m), this was due to cost overruns upon the account finalisation of 2 projects, namely the MITI HQ and administrative building in Qatar. Due to cost overruns, management shared that it only earned a 1-3% PBT margin on the said jobs.

• It’s all about execution. Following strong YTD job wins of RM1.4bn (FY15: RM3bn), WCT’s orderbook now stands at a high of RM4.4bn (3.8x cover on FY15 construction revenue). Management reaffirmed that execution will now be its focus and is hopeful for margins to be lifted by its infra jobs.

• Slow property sales. WCT registered RM281m in property sales for the 9M period (-8% YoY). This is still within our full year assumption of RM350m but below management’s target of RM600m. Unbilled sales of RM562m implies a decent cover of 1.8x on FY15 property revenue.

Risks

• The key risks are its inconsistency in earnings delivery from quarter to quarter and high net gearing (88%).

Forecasts

• Our forecast has already been cut following the weak results.

Rating

Downgrade to HOLD, TP: RM1.99

• Contrary to expectations, management’s guidance on WCT’s new strategic direction seemed to be a status quo rather than a value creating change.

• Despite TS Lim’s entrance into WCT at RM2.50/share (31% premium to last close), we fail to see an eventual near term rerating with an unchanged strategic direction coupled with the less than inspiring results.

Valuation

• With the results inconsistency, we cut our P/E target from 14x to 12x and accordingly reduce our SOP based TP from RM2.14 to RM1.99. This implies a rather expensive FY16 P/E of 25x but a more palatable 17.2x on FY17 once earnings display a recovery.

Source: Hong Leong Investment Bank Research - 23 Nov 2016